First American Financial Corporation — Q3 2022 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. The company provides title insurance and related real estate services, specialty insurance, and corporate investment activities. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,824 | $2,556 | $5,920 | $6,848 |
| Net income attributable to company | $2 | $445 | $209 | $981 |
| Diluted EPS | $0.02 | $4.00 | $1.93 | $8.81 |
| Cash provided by operating activities | Not separately presented for quarter | $533 | $876 |
- Revenue and earnings: Q3 revenue fell 28.6% and nine-month revenue fell 13.6%. Q3 pretax loss was $3 million versus pretax income of $604 million a year earlier. Reported revenue includes investment gains and losses.
- Key Q3 drivers: Net investment losses were $226 million versus gains of $276 million in Q3 2021, a $502 million unfavorable swing. Title Insurance and Services pretax income was $186 million, down 47%; its pretax margin declined to 9.9% from 16.4%. Specialty Insurance posted a $6 million pretax loss.
- Real estate activity: Title segment revenue declined 12.2%. Direct premiums and escrow fees fell 17.3%, and agent premiums fell 8.9%. The company’s domestic title orders opened per day fell 35.3%; residential refinance orders were especially weak amid sharply higher mortgage rates.
- Investment items: Q3 included $151 million of unrealized losses related to venture investments and a $118 million impairment charge on private venture-stage investments. Offerpad-related unrealized losses were $31 million in Q3 and $167 million for the nine months. Higher short-term rates lifted net investment income.
- Cash, liquidity and debt: Cash and cash equivalents were $2,361 at September 30, up from $1,228 at year-end; operating cash flow for the nine months was $533. Notes and contracts payable were $1,647, while secured financings payable were $341. Deposits were $6,728, up from $5,069. Debt-to-capitalization was 30.5%, versus 27.4% at year-end; adjusted debt-to-capitalization was 22.8%, versus 21.9%.
- Capital and investment values: Total equity was $4,531, down from $5,783 at year-end, with accumulated other comprehensive loss increasing to $1,048 from $92, principally reflecting falling debt-security values. Available-for-sale debt securities had $1,162 of gross unrealized losses at quarter-end; management attributed these losses to non-credit factors and said it did not expect to be required to sell before recovery.
Changes, outlook and significant matters
- The company attributed weaker results primarily to falling residential transaction and refinancing volumes and the reversal in investment results. Title insurance results remain sensitive to interest rates, transaction mix and fixed-cost absorption.
- The company acquired a California title, underwriting and escrow provider for $300 million in cash in May. It contributed $79 million in revenue and $11 million in pretax income since acquisition through September 30. The company completed acquisitions totaling $311 million in cash during the nine-month period.
- The property and casualty insurance business wind-down was substantially completed in Q3. Specialty Insurance revenue declined 21.1% for the quarter; home warranty claims were 58.9% of premiums, compared with 56.8% a year earlier.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management said available resources—including operating cash flows, liquid assets and the undrawn $700 million revolving facility—should meet anticipated obligations for at least 12 months. No facility borrowings were outstanding at September 30. Management expected quarterly dividends to continue at or above the then-current level; the quarterly dividend had increased to $0.52 per share.
- The company repurchased 6.8 million shares for $407 million in the first nine months and had $321 million remaining under its current $400 million authorization at quarter-end.
- Risks and contingencies: Key exposures include further deterioration in real estate markets, interest-rate and investment volatility, venture-investment impairments, title claims, regulatory scrutiny, cybersecurity and data-protection events, and reliance on financial institutions and large mortgage counterparties. The company disclosed ongoing class actions and regulatory matters related to its 2019 information-security incident; loss outcomes could not yet be assessed for the class actions. Management did not expect the disclosed proceedings to materially harm overall financial condition, results or cash flows, but noted that investigations could lead to business-practice changes with material effects.
- Escrow, trust, like-kind exchange and mortgage-related customer funds are largely excluded from company assets; the company noted potential contingent liability for their disposition. Escrow deposits totaled $11.7 billion and like-kind exchange funds administered totaled $4.1 billion at quarter-end.
Investor verification priorities
- Track title order volumes, especially purchase and refinance activity, and compare their recovery or further decline with mortgage-rate and housing-market conditions.
- Separate recurring operating performance from volatile investment gains and losses; monitor Offerpad and private venture holdings, including additional impairments or monetization.
- Review debt-security fair-value losses, liquidity needs and any effect of interest rates on statutory capital, investment income and the ability to hold securities to recovery.
- Monitor title loss reserves and claims assumptions: the filing estimates that a 50-basis-point change in recent policy-year loss rates could change IBNR reserves by $157 million.
- Confirm acquisition integration and returns, the completed property and casualty wind-down, and the effect of home warranty claims severity on segment profitability.
- Follow the 2019 incident-related lawsuits and New York Department of Financial Services proceeding, alongside any resulting settlements, penalties or operational requirements.